In our prior alerts, we reported that under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the temporary rule promulgated by the Securities and Exchange Commission (SEC) thereunder, all municipal advisors were required to register with the SEC on or before Oct. 1, 2010, and to disclose certain information, such as prior disciplinary actions or proceedings. This disclosure requirement was designed to assist municipalities in retaining a qualified financial advisor.
Since our last alert regarding municipal advisors (Sept. 20, 2010), the SEC extended this temporary registration period, which was scheduled to end on Dec. 31, 2011. Additionally, the Municipal Securities Rulemaking Board (MSRB) has promulgated proposed and final rules that impose, among other things, a separate registration requirement for municipal advisors.
Municipal Advisors
Generally, a municipal advisor is any person or entity that (a) provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products (e.g., swaps and other derivatives, guaranteed investment contracts and investment strategies), or the issuance of municipal securities; or (b) undertakes a solicitation of a municipal entity with respect to municipal financial products, investment advisory services or the issuance of municipal securities.
Examples of entities that may qualify as municipal advisors include guaranteed investment contract brokers, financial advisors, third-party marketers, placement agents, solicitors, finders and swap advisors. The following are NOT generally municipal advisors: municipal entities and their employees, brokers, dealers, municipal securities dealers serving as underwriters, investment advisors providing investment advice, certain commodity traders, and attorneys providing traditional legal services.
Implications of Extension for Municipal Advisors
Beginning on Sept. 1, 2010, municipal advisors were required to register with the SEC by completing Form MA-T through the SEC’s website. This registration requirement was put in place as a temporary measure to allow the SEC time to promulgate a permanent registration rule. The temporary registration period was set to expire on Dec. 31, 2011, at which time a new registration regime under the permanent rule was scheduled to have been in place. In December 2011, the SEC extended its temporary registration requirement to Sept. 30, 2012. Thus, absent any further action by the SEC in the interim, all municipal advisors that are currently registered with the SEC under the original temporary registration rule will not have to take any additional registration action until Sept. 30, 2012. Any individual or entity qualifying as a municipal advisor under the Dodd-Frank Act prior to Sept. 30, 2012, and that has not yet registered with the SEC, must complete Form MA-T.
MSRB Registration Requirements for Municipal Advisors
In addition to registering with the SEC, municipal advisors must register with the MSRB before engaging in municipal securities and advisory activities. To do so, a municipal advisor has to provide the MSRB with its SEC registration number, file the appropriate forms electronically on the MSRB’s website and pay an initial fee of $100. Following the initial registration, a municipal advisor also must pay an annual fee of $500 for each fiscal year in which the advisor conducts municipal advisory activities. The annual fee must be received by the MSRB no later than Oct. 31 of the fiscal year for which the fee is paid.
Other MSRB Rules That Apply to Municipal Advisors
In addition to the registration requirement, the MSRB currently imposes a few other requirements on municipal advisors. By way of example, all municipal advisors are required to maintain an e-mail account and appoint a person to act as a primary contact with the MSRB. Municipal advisors must update this information within 17 business days after the end of each calendar year. In addition to the fiduciary obligation of municipal advisors to their clients imposed by the SEC, the MSRB imposes a broad duty to “deal fairly with all persons” and prohibits municipal advisors from engaging in any “deceptive, dishonest, or unfair practice.”
The MSRB has proposed a number of additional rules for municipal advisors, but they are currently delayed. The MSRB has indicated that it plans to implement its broadened statutory mandate under the Dodd-Frank Act by adopting a comprehensive set of rules for municipal advisors that seek to prohibit fraudulent and manipulative practices; set forth municipal advisors’ fiduciary obligation to their municipal clients; require fair treatment of investors, municipal entities, and other market participants; and restrict real and perceived conflicts of interest. The proposed rules are also intended to ensure rigorous standards of professional qualification and promote market efficiency.
One such proposed rule would prohibit publication or dissemination of any advertisement relating to municipal securities of the issuer that the municipal advisor knows or has reason to know to be materially false or misleading. Further, the proposed rule would impose an even stricter standard on any advertisement of a municipal advisor’s professional services. Such advertisements may not be materially false or misleading, regardless of a municipal advisor’s actual knowledge of any false or misleading content.
SEC Examinations
Currently, the SEC’s Office of Compliance, Inspections and Examination is preparing procedures for conducting examinations of independent, non-dealer municipal advisors to determine their compliance with the rules pertaining to municipal securities.
In the coming months, we will continue to monitor rules and regulations promulgated by the SEC and the MSRB pursuant to the Dodd-Frank Act, as well as any other related guidance from federal agencies. If you have any questions regarding the municipal securities provisions of the Act, MSRB rules governing municipal advisors or other recent changes to the municipal securities regulatory framework, please contact the authors or visit McGuireWoods’ website.